U.A.E. Credit Bureau Could Slam Brakes on Consumer Lending

Bank lending could be curbed once a U.A.E credit bureau is up and running

A fully-functional credit bureau in the United Arab Emirates is likely to curb the lending excesses and rise in consumer debt seen in previous years.

But with preparations for the consumer reporting agency in full swing – a group of 12 banks have already started collecting data and running trial runs ahead of the full introduction over the next one to two years – some bankers are increasingly concerned about the initial economic disruption the long-awaited project may cause.

“The consequence is banks will stop lending because they will discover every single customer overborrowed,” said Abdulaziz Al Ghurair, chairman of the U.A.E. Banks Federation. “For 6 to 12 months there will be almost zero lending to existing customers who had borrowed up to the limit so the customer will hit a wall,” he said. Mr. Al Ghurair is also chief executive of Dubai’s largest privately-owned bank Mashreq.

That would be unwelcome news for the U.A.E. economy which only recently starting picking up steam again thanks to high oil prices and renewed investor interest as the country is also considered more stable than many of its Middle Eastern neighbors.

With the rise in consumer lending, however, U.A.E. household debt is also steadily climbing, which some bankers said may pose a future risk to the U.A.E. banking system.

Until now, in the absence of a national credit bureau and credit ratings, existing borrowers were able to easily apply for loans and credit cards with different lenders, allowing them to consume beyond their means. A credit bureau would allow lenders to form a much better picture of their customers’ creditworthiness and ultimately even offer more competitive prices, even if that would imply a short-term negative impact.

“For the U.A.E. lending and economic system, this is a small price to pay in return for a more balanced and transparent credit market over the medium to long run,” said Florence Eid, chief economist at Arabia Monitor, an economic research and strategy firm.

The U.A.E. credit bureau isn’t ready yet and it may take several more years before it will be fully operational. One bone of contention, for example, is that the credit bureau reckons that banks should ask consent from their customers to probe their credit history, something the banks argue should be compulsory, said Mr. Al Ghurair.

Until all issues are ironed out and the credit bureau will finally become a part of the banking landscape, Mr. Al Ghurair offered the following advice:

“Everyone now really has to save money (in order to be able) to repay the banks.”